Summer Box Office: Analyst Cuts Financial Expectations for Exhibitors

5:51 AM PST 07/07/2014 by Georg Szalai
Courtesy of AEG

The third-quarter box office is "starting off in a deep hole," says one Wall Street observer, but another says the focus of investors in cinema chain stocks "has already shifted to a stronger 2015 film slate."

Amid weak July Fourth box-office trends, analysts on Monday chimed in on industry momentum and what it means for exhibition stocks.

MKM Partners analyst Eric Handler titled his report Films Stumble Through July 4th Holiday Weekend. The third-quarter box office is "starting off in a deep hole," he concluded.

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Concluded Handler: "Quarter-to-date box-office revenue based on Regal's fiscal calendar (through two weekends) is down 43 percent, while revenue based on Cinemark and AMC Entertainment's calendars (through its first full week) is down 46 percent. While still early, the sharp decline does not bode well for the third-quarter box office as comparisons are quite difficult in July and August, which on average account for roughly 80 percent of the quarter's revenue.‎"

He also reviewed the latest weekend figures.

"No sparks fly over the holiday-weekend box office as results come up short versus expectations with a steeper than projected decline," the analyst wrote. "The weekend box office saw the top 10 films gross $113 million (-48 percent), which was below our $119.5 million forecast. Driving the underperformance were weaker-than-anticipated results from the weekend's top three films — Transformers: Age of Extinction, Tammy and Deliver Us From Evil."

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B. Riley & Co. analyst Eric Wold reduced his second-quarter earnings expectations for exhibitors Cinemark Holdings, Carmike Cinemas and Imax "after a weaker-than-expected June" and downgraded Cinemark's stock from "buy" to "neutral" after a 17.5 percent increase since his upgrade at the end of May. He had previously reduced his expectations for Regal.

"There were two clear disappointments that dragged down June's results: A Million Ways to Die in the West and How to Train Your Dragon 2," he wrote. "In total, we project that at least $100 million in box office was lost from the second quarter versus our original projections with the summer-to-date box office now declining by 17.8 percent compared to a decline of 13.5 percent" that he had projected in late May.

However, Wold suggested that the hit to revenue would be bigger than the earnings hit "given expected benefits from reduced film concentration (the top three films represented 24.3 percent of box office versus 29.4 percent last year) and reduced box-office contribution from 3D and Imax films (which will lessen the impact from the associated licensing payments)."

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Overall, Wold remains bullish on the sector's stocks. "Exhibitors outperformed the S&P 500 by more than 2x in the face of worsening box office," he wrote. "We continue to believe investor focus has already shifted to a stronger 2015 film slate."

Regal Entertainment Group shares at the end of June set a 52-week high of $21.56. On Monday, they were down 1.4 percent at $20.92 as of 10:50 a.m. ET. Cinemark's stock hit its latest 52-week high of $35.96 before the weekend and was down 2.6 percent in early Monday trading. Carmike's stock reached its 52-week high of $36.22 in mid-June. Early Monday, it was down 0.7 percent. Imax shares had hit their high for the past year late in 2013 at $31.23; on Monday they were down 0.9 percent in early trading.

As expected, Transformers: Age of Extinction this weekend became the summer's first film to repeat atop the U.S. box office, Handler noted, but also highlighted that its three-day gross of $36.4 million was "well below our $45 million forecast."

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He added: "New releases Tammy and Deliver Us From Evil ended in second and third, taking in $21.2 million and $9.5 million, respectively, coming up short versus our projections of $22.0 million and $13.0 million."

The latest Transformers film saw its box office fall a steep 64 percent from its opening-weekend gross, "which represents the steepest decline of the franchise's four films and will likely finish as the only title in the series to fall short of a $300 million North American gross," Handler wrote. "However, Age of Extinction is performing extremely well internationally, topping $400 million in just over two weekends of release and with Latin America and Europe still awaiting their opening bows. China has been the highest-grossing country for the film with $213 million, a record pace for the country."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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